RELIANCE NATURAL RESOURCES LTD. v. RELIANCE INDUSTRIES LTD.

Further, the power of the court under Sections 391 to 394 of the Companies Act is wide enough to make necessary changes for working of the Scheme. This power is specific to the facts and circumstances of the case at hand. Nevertheless, · ·

RELIANCE NATURAL RESOURCES LTD. v. 833 RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] this power does not extend to making anv substantial or substantive changes to the Scheme.

Therefore, the Company Court enjoys jurisdiction to entertain the application under Sections 392 and 394 of the Companies Act. B

B. Binding Nature of the Memorandum of Understanding

The. MoU was signed as a private family arrangement or understanding between the two brothers, Mukesh and Anil Ambani, and their mother. Contents of the MoU were not made c public, and even in the present proceedings, they were revealed in parts. Clearly, the MoU does not fall under the corporate domain - it was neither approved by the shareholders, nor was it attached to the scheme. Therefore, technically, the MoU is not legally binding. D

Nevertheless, cognizance can be taken of the fact that the MoU formed the backdrop of the Scheme, and therefore, contents of the Scheme have to be interpreted in the light of the MoU. E C. Considerations to determine "suitable arrangement" under Clause 19 of the Scheme.

"Suitable arrangement" under clause 19 of the Scheme must not be merely suitable for RIL. It has a broader meaning. F Such an arrangement must be suitable for the interests of the shareh~lders of RNRL as reflected by the MoU, and RIL; the obligation of RIL under the PSC; the national policy on gas including the decisions of EGOM and the Gas Utilization Policy; and the broader national and public interest. G D. Proper Interpretation of the PSC

The objective of the PSC inter alia is to regulate the supply and distribution of gas. Keeping this objective in mind, Article 21 of the PSC must be interpreted to give the power to the H

834 SUPREME COURT REPORTS [201 O] 5 S.C.R.

A Government to determine both the valuation and price of gas. It is not feasible to restrict the power of the Government in such matters of national importance, especially when the governing contract, the PSC, also provides for it.

B E. Role of the Government

In a constitutional democracy like ours, the national assets belong to the people. The Government holds such natural resources in trust. Legally, therefore, the Government owns such assets for the purposes of developing them in the interests of C the people. In the present case, the Government owns the gas till it reaches its ultimate consumer.

A mechanism is provided under the PSC between the Government and the Contractor (RIL, in the present case). The D PSC shall over·ride any other contractual obligation between the Contractor and any other party.

F. Relief (a) Though the Contractor (RIL) has the marketing freedom E to sell the product from the contract area to other consumers, this freedom is not absolute. The price at which the produce will be sold to the consumer would be subject to government's approval. The tenure of such contracts can't be such that it vitiates the development plan as approved by the government. F fhefefore 1 the GSMA and the GSPA entered into with RNRL should fix the price, quantity and tenure in accordance with the ·PSC. (b} The EGOM has already set the price of gas for the purpose of the PSC. The parties must abide by this, and other eondltlons placed by the Government policy. The GSMA/GSPA deeply affects the interests of the shareholders of both the companies. These interests must be balanced. This balance cannot b~ struck by the court as the court does not have the power under Sections 391-394 to create new conditions under the scheme. In view of the same, RIL is directed to initiate

RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 835

INDUSTRIES LTD. renegotiation with RNRL within six weeks the terms of the A GSMA so that their interests are safeguarded and finalize the same within eight weeks thereafter and the resultant decision be placed before the Company Court for necessary orders.

(c) While renegotiating the terms of GSMA, the following 8 must be kept in mind:

(1) The terms of the PSC shall have an over-riding effect;

(2) The parties cannot violate the policy of the C . ,.. Government in the form of the Gas Utilization Policy and national interests; ... (3) The parties should take into account the MoU, even though it is not legally binding, it is a commitment which reflects the good interests .of both the parties; D

(d) The parties must restrict their negotiations within the conditions of the Government policy, as refle'cted inter alia by the Gas Utilization Policy and EGOM decisions. E

93. With the above directions/observations, all the appeals and I.A. No.1 are disposed of. No order as to costs.

B. SUDERSHAN REDDY, J. 1. I.A. No. 1 for permission to file Special Leave Petition is allowed. F

2. We grant special leave and proceed to dispose of all the appeals.

PART I

PROLOGUE G

"Jus publicum privatorum pactis mutari non potest."

Public law cannot be changed by private pacts.

- Digest of Justinian H

836 SUPREME COURT REPORTS [2010] 5 S.C.R.

A "Political democracy cannot last unless there is at its base social democracy .... On the social plane, we have in India a society based on the principle of graded inequality, which means elevation of some and degradation of others. On the economic plane, we have a society in which there B are some who have immense wealth as against many who live in abject poverty .... How long shall we continue to live this life of contradictions? How long shall we continue to deny equality in our social and economic life? If we continue to deny it for long, we will do so only by putting c our political democracy in peril. We must remove this contradiction at the earliest possible moment or else those who suffer from inequality will blow up the structure of political democracy which this Assembly has so laboriously built up".

D 3. Those who know the Constitutional history of India recognize the above to be the wise words of Dr. Ambedkar, one of our founding fathers. Those who are concerned about the welfare of our people, and the future of our nation, his second warning will always be a matter of intense intellectual E disquiet: "Indeed if,• may say so, if things go wrong under the new Constitution, the reason will not be that we had a bad Constitution. What we will have to say is that Man was vile." It is never enough to have a written constitution. We need people who, in the course of working the Constitution, to borrow a F memorable phrase from Granville Austin, will exhibit qualities of great integrity and a deeply felt ethical urgency to ameliorate the social and economic conditions in which our people live and suffer. That obligation arises from the very politico-constitutional ideals and structures upon which the State has been formed and the future of the nation premised. In disputes such as the one before this Court, the lens of the Constitution has to be used to examine the implications with respect to achievements of such ideals and the strength of our institutions. The power that is vested in the State, and exercised by its agents, is the power of all the people and not just of those with great wealth and

RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 837

INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]

status. The vesting of such powers is an act of faith and of trust, ~ A two qualities that are to be earned, sustained and nurtured. Continuance of such faith and trust undoubtedly depends, in the least, on the belief that people have that such powers are being exercised to further the Constitutional goals. To the extent that the people begin to believe that their faith and trust were B misplaced, and that their collective powers are being improperly used for the benefit of the few, as opposed to being used for public welfare and interests, one may reasonably conclude that at least the effective functioning of the State would have been compromised. Those with knowledge of history, and an c inclination to learn from, it would necessarily be concerned about the situation today and potential consequences in the future. For them the. words of Dr. Ambedkar would appear to be prescient and wise.

4. The wisdom of the ages, garnered through eons of D · humanity's collective struggles to find for all a life of dignity and . fraternity - a dignity that arises from and is informed by liberty, equality, and justice in all walks of life and a fraternity that seeks to promote such dignity for all is the fire in which the Constitution of India has been forged. The very structure and text of the E 1 Constitution, when viewed through the lens of history and the

working of the instrument itself, clearly demonstrates that it crystallizes collective human wisdom in its triadic ethical foundations. Those foundations are: (i) the Preamble that soars in eloquence in _its articulation of collective human aspirations as national goals and sets out the raison d'etre for the nation itself; (ii) the Fundamental Rights, that provide various necessary freedoms for the individuals and ~ocial groups, and places upon the State certain affirmative obligations to eliminate those institutional and socio-economic conditions limiting such freedoms, so that all can strive towards lhe achievement of the goals set forth in the Preamble; and (3) the Directive Principles of State Policy, fundamental to governance and necessary for the achievement of all round socio-economic H

838 SUPREME COURT REPORTS [2010] 5 S.C.R.

A development so that the goals of the Preamble can be secured, and the effective exercise of the Fundamental Rights by all can be ensured.

5. It was recognized early in our struggle for freedom that, as India awakens politically an explosive situation could develop 8 if the contradictions were not resolved soon. Thus, it was felt thatthe State ought to play a key role in ensuring that all the people are assured, a life informed by liberty, equality, justice and fraternity, so that their dignity, as individuals and as social beings, can be secured. To this effect, the State has been given the powers to place -reasonable restrictions even on the Fundamental Rights of the individuals for the achievement of broader c:iood for all, tlle powers to enact socio-economic legislation to effectuate re-distribution of wealth and ensure equitable access to. material resources and to frame policies that ameliorate the·· harsh consequences of the civil and the market spheres of ·social actiOfl that people participate in. Where such power is vested in trust by the people, it implies, as a necessary corollary, a trust·that such powers will be fully used to further the Constitutional goals within the four corners of Constitutional permissibility. Availability of such powers to use, in a practical sense, implies that those powers have not 1 been abjured or derogated .from.

· · 6. The dawn of independence evoked much hope; and also much anxiety, especially amongst scholars and observers from the West, about the feasibility of the experiment of India as a Constitutional democracy. Yet, in our seventh decade of freedom and the sixtieth year of constituting ourse~es as a Sovereign, Socialist, Secular, Democratic Republic, it is apparent that we have survived, and indeed by and large flourished as a political democracy. In part, this was surely on account of the great moral integrity and wisdom that our founding fathers and early political leadership brought to the table, and the efforts they put in towards building the institutions

RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 839

INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]

of our democracy. Additionally, credit must also go to the socio- A political and economic policies initiated and implemented, of course with varying degree of success and failure, for sustaining the hope that the promises enshrined in the Constitution are at least being sought to be achieved. However, a much larger measure of credit ought to go to the people: those s people who turn up in ever larger numbers to the voting booths and continue to retain trust in the basic principles of democracy, notwithstanding their abysmal lot in life. Yet, When the State attempts to alleviate just a part of the burden of their continued dehumanized condition, such attempts are decried as populist c by the elite of this country.

7. So, willy-nilly, we come back to the question asked by Dr. Ambedkar: how long will our people bear the contradictions of endemic and gross inequalities? An aspiring and youthful population can be a great boost to the economy and the· D society. It would be tautological to state that the GDP would grow rapidly with a larger proportion of the people in the productive phases of their lives. But, the same youth unemployed or underemployed, malnourished and without the capacity or hope to lead or achieve a dignified life, can be the most dangerous of all forces.

8. A small portion of our population, over the past two decades, has been chanting incessantly for increased privatization of the material resources of the community, and some of them even doubt whether the goals of equality and social justice are capable of being addressed directly. They argue that economic growth will eventually trickle doll'fn and lift everyone up. For those at the bottom of the economic and social pyramid, it appears that the Nation has forsaken those goals as unattainable at best and unworthy at worst. The neo- liberal agenda has increasingly eviscerated the State of stature. and power, bringing vast benefits to the few, modest benefits for some, while leaving everybody else, the majority, behjnd.

840 SUPREME COURT REPORTS [2010] 5 S.C.R.

A "... these global imbalances are morally unacceptable and politically unsustainable." 1 (emphasis added).

9. We have heard a lot about free markets and freedom to market. We must confess that we were perplexed by the extent to which it was pressed that contractual arrangements 8 between private parties with the State and amongst themselves could displace the obligations of the State to ttie people themselves. Judge Richard Posner, one of the doyens of the free market ideology and responsible for building the intellectual. foundations of the neo-liberal segments of the law and· C economics jurisprudence, had this to say about the recent global financial crisis and it is worth quoting him in-extenso:

"Some conservatives believe that the depression is the . result of unwise government policies. I believe it is a D market failure. The government's myopia, passivity, and blunders played a critical role in allowing the recession to balloon into a depression, and so have several fortuitous factors. But without any government regulation of the financial industry, the economy would still, in all likelihood, E be in a depression. We are learning from it that we need a more active and intelligent government to keep our moael of capitalist economy from running off the rails. The movement to deregulate the financial industry went too far by exaggerating the resilience-the self-healing powers-- F of laissez-faire capitalism". 2

10. History has repeatedly shown that a culture of uncontained greed along with uncontrolled markets leads to disasters. Human rationality, with respect to pursuit of lucre, is essentially short run. So long as there appear to be possibilities G of making profits, especially windfall profits, the fears that the

1. Quoted in Joseph Stiglitiz, Making Globalization Work: The Next Steps to Global Justice, p.8, Allen Lane (2006)

2. Richard A. Posner: "A Failure of Capitalism: The Crisis of 08 and the H Descent Into Depression'', p. xi Harvard University Press (2009).

RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 841

INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]

competitors would reap them will drive busir.esses into taking greater and greater risks; in fact, even by self-enforcement of blindness to the potential for market collapse. To say that it was a failure of regulation is trite. Markets failed because regulation had practically ceased to exist. Finally veering around to the view that regulation of markets is absolutely essential, after spending a lifetime arguing for the opposite, and noting that the capacity for self-regulation was highly over-rated, Judge Posner in his own inimitable manner says:

"If you're worried that lions are eating too many zebras, you don't say to the lions, 'You're eating too many zebras'. You c have to build a fence around the lions. They're not going to build it." 3

11. Historically, and all across the globe, predatory forms of capitalism seem to o(ganize themselves, first and foremost, around the extractive industries that seek to exploit the vast, but exhaustible, natural resources. Water, forests, minerals and oil - they are all being privatized; and not yet satisfied, the voices that speak for predatory capitalism seek more, ignorin_g the lessons from history and current experiences. One of the lessons of history is that, barring a few, most of the countrie's\· endowed with vast and easily exploitable natural resources· have fared far worse than t~ose with smaller endowments, on almost every social and economic indicia. As Joseph Stiglitz points out: F "[T]here is a curious phenomenon ..... 'resource curse.' It appears, that on average-, resource rich countries have performed worse than those with smaller endowments - quite the opposite Qf what might have been expected ........... [B]ut ev~n when countries as a whole have G done fairly well, resource rich countries are often marked by large inequality: rich countries with poor people ........ [T]wo-thirds of the people" in an oil rich country that is also

3. Richard A. Posner, ibid. H

842 SUPREME COURT REPORTS [2010] 5 S.C.R. -

A a member of a global oil producing countries group "live in poverty as the fruits of the country's oil bounty go to a minority ...... These puzzles cry out for an· explanation, one that will allow countries to do something to undo the resource curse ..... We understand in particular that much B of the problem is political in nature ....... [W]hen compared to countries dependant on the export of agricultural commodities, mineral and oil exporting countries suffer from unusually high poverty, poor health care, widespread malnutrition, high rates of child mortality, low life expectancy, c and poor educational performance - all of which are surprising findings given the revenue streams of resource- rich countries." 5

12. We draw attention to this problem, because, even though it is often associated with those countries that depend mostly on earnings from export of natural resources, similar effects can also arise from activities within the domestic economy. Take the case of India itself. We cannot by any stretch of imagination claim that we are a resource poor country. Yet, as we cast a glance across the face of our land, the greater incidence of social unrest, and movements for greater self determination, seem to occur by and large in states and regions that have plenty of natural wealth and paradoxically suffer from low levels of human development. We hasten to add that we are not suggesting that absence of resources would lead to a F better situation. Rather, it is to point out that the problems arise because exploitation of those resources occurs without appropriate supervision by the State as to the rates of exploitation, equitable distribution of the wealth it generates, collusions between the extractive industry and some agents of G

4. The word political is being used in a technical sense to denote the state and all of its institutions, rather than merely political parties or to denounce the normative desirability of democratic political processes.

5. Joseph E. Stiglitz. Making Natural Resources into a Blessing rather than a Curse, in "Covering Oil" Ed. Svetlana Tsalik and Anya Schiffrin, Open Society --H Institute (2005), p. 13-14.

RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 843

INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]

the State and the consequent evisceration of the moral authority A of the institutions of the State.

13. The crux of the problem is, as P[Of. Terry Lynn Karl says:

".... utilizing petroleum wealth effectively is not easy ..... . B Because the institutional setting is generally incapable of dealing with economic manifestations of resource curse, it ends up transforming them in a vicious development cycle or "staple trap." 6 c

14. One would have expected, that with the resources being owned by the people as a nation, it would be the State public institutions that would actually operate the extraction industry. For a few decades that was the case, and it was beset by problems of administrative apathy and even pilferage. Over the 0 past two decades vast tracts of Nation's resources have again begun to be licensed for exploitation by private parties. Be that as it may, it must be emphasized that the on going process cannot dispense with the role to be played by the State. Strong State institutions are even more necessary when we are dealing with Nation's resources and we allow contractors to exploit them.

15. The law is for the benefit of the people. Even where it does not work in its full measure all the time, the public nature of law is still capable of exerting moral authority and bringing comfort to the people. But, when law is pushed into unseen categories, effectively hidden from public gaze, it raises suspicion - especially when it purports to deal with the collective resources of the people. When the threshold of public scrutiny is crossed, it raises vital issues regarding our continued fealty to democratic values, constitutionalism, accountability, transparency and the rule of law. Jody Freeman and Martha Minnow write:

6. Terry Lynn Karl "Understanding the Resource Curse" in Covering Oil (Open Society Initiative 2005). H

844 SUPREME COURT REPORTS [2010] 5 S.C.R.

A "[T]he primary concern, voiced in recent years by critics in public policy circles and in academia, is that the ubiquity of governance by private contractors strikingly outstrips our legal and political capacities of oversight meant to ensure that the contractors' execution of those governmental functions complies with democratic norms." 7 ·

16. We are not saying that markets have no role to play in a developing economy or that private initiative be suppressed and that all markets are essentially and only tools for expropriation and continuance of social injustices. We are stating that our Constitution posits that markets can be inimical to social justice, especially when left unregulated. Laissez faire market is a myth and it is, as Prof. Cass Sunstein points out:

" .... a grotesque misdescription of what free markets actually require and entail. Free markets depend for their existence on law ...... moreover, the law that underlies free markets is coercive in the sense that in addition to facilitating individual transactions, it stops people from doing many things they would like to do. This point is not by any means a critique of free markets. But it suggests that markets should be understood as a legal construct, to be evaluated on the basis cif whether they promote human interests, rather than as a part of nature and the natural order. .... markets are a tool, to be used when they promote human purposes, and to be abandoned when they fail to do so ... Achievement of social justice is a higher value than the protection of free markets; markets are mere instruments to be evaluated by their effects."8

17. The Constitution of India postulates that monopolies, ·created by an inequitable distribution of resources and their concentration in the hands of the few, are inimical to democracy

7.• Government by Contract: Outsourcing And American Democracy, Ed. Jody Freeman and American Democracy.

8. Cass Sunstein: Free Markets and Social Justice (Oxford University Press, 1997) H

RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 845

INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]

and the values of equality and justice in all .spheres of social action. They were the lessons of history. While large economic organizations might be necessary to accomplish certain kinds . of tasks, it is imperative that the State always be. watchful that they do not take over the essential functions of the State, especially of policy formulation. In its dealings with such entities, the State should always be mindful that it does not convey that its public law duties could be bought or abrogated in any manner.

18. One may ask why in a Company Petition such a discussion of constitutional values has had to come about. Such c is the nature of the dispute itself. The Comparw Petition, and the Scheme of Arrangement that it arises from, ostensibly, are to be dealt under Sections 391 through 394 of the Companies Act; but, involve at their foundations, a claim by Reliance Natural Resources Limited that it is entitled to receive, on account of a private pact between members of the Ambani family, vast quantities of natural gas, amounting to a significant portion of what would be available for the entire country, at a low price and for a long time, de-hors any policy made by the Government of India. It claims that the Gol has a right to enter mto and has actually entered into a contract that allows, Reliance Industry Limited to produce and decide how to use a precious and a scarce natural resource belonging to the people of this nation without any governmental supervision. Further, RNRL also claims, that its vested interest in such vast quantities of natural gas is such, that subsequently framed governmental policy cannot have a bearing on such an entitlement irrespective of public interest implications.

19. Apart from the above, this particular case also implicates aspects of accountability of members· of the managements of corporations, who are also promoters and powerful shareholders, to the Board of Directors and other shareholders. One of the principal claims of RNRL in this case is that a private pact between the family members of the H

846 SUPREME COURT REPORTS [2010] 5 S.C.R.

A Ambani family can bind the Board and the Company, in the context of reorganization of the company without the shareholders having any knowledge of the extent of value that is actually likely to be demerged, even if such likely value runs into many thousands of crores of rupees and possibly hundred fold more than the assets and liabilities that were actually shown as being demerged in the Scheme document placed befo~e the shareholders.

20. For a long time now, it has been well recognized that the modern industrial and post-industrial corporations control such a large extent of economic and social spheres that their activities necessarily have a wide and pervasive impact on the lives of most of the people of the country. We recognize that, in many normal instances, when issues of PL1blic interest are not apparent on the face of the record, then a Company Petition D is normally, and rightly, treated as a matter of corporate law. However, when the conflict involves the right to use vast swaths of a national natural resource that is owned by the people, public law is necessarily implicated to a small or a large extent. Further, when publicly listed companies, with many millions of E shareholders of ordinary people, do not reveal the full extent of value that is to be transferred, it would obviously implicate the broader principles of corporate law.

21. That is why we began this section with an epigraph, F "Jus pub/icum privatorum pactis mutari non potest" from the Digest of Justinian. Natural Gas belongs to the people of India, and vests in the Union of India, to be held for the purposes of the Union. The Constitution of India commands the Government to frame policy to prevent the distribution of such resources in G a manner that may be inimical to national development. Ultimately, the residual owners of a company are its shareholders, and they have a right to know what is happening to the company and its assets, including assets by way of contractual rights, so that they can take an informed decision about a proposal that is put up for their consideration. For the ~ H

RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 847

INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.] past three hundred years of evolution of corporate law, the A principal theme has been the protection of those who give their· wealth and resour~es in trust to a company. Managements and Board of Directors of companies have a fiduciary responsibility to the shareholders, and neither the processes nor the substantive objectives of protection of the shareholders can be 8 derogated from.

22. A number of acronyms have been used in this judgment. A glossary is annexed herewith for referral.

23. It is with the above observations we shall now proceed C to consider the facts and the issues that arise for our consideration.

PART II

THE FACTUAL MATRIX D

24. In April 2000, a consortium of companies, Reliance Industries Limited and NIKO, together forming the Contractor, entered into a Production Sharing Contract with the Union of India to explore for and produce Petroleum, which includes both crude oil ~nd natural gas as applicable, in a block KG-DWN- 98/3, located off the eastern sea shore of Andhra Pradesh. This · block has been referred to as KG-D6 by the parties and we shall adopt that nomenclature; however, the judgment and decision shall be understood as being applicable to the entire F KGcDWN-98/3 block.

25. In 2002, RIL announced the discovery of a very large reservoir of natural gas in KG-D6. In the same year Shri. Dhirubhai Ambani, the founder of RIL, passed away and subsequently the management of RIL was led by Mukesh D. G Ambani, the elder son, as the Chairman and Managing Director and Anil D. Ambani, the younger son, as the Vice- Chairman and Joint Managing Director. On May 21, 2003, RI~ submitted its conclusions to Gol that the reservoir discovered H

848 SUPREME COURT REPORTS [2010] 5 S.C.R.

A was a· commercial discovery, which was subsequently certified t() be so by Gol on 10.01.2004.

26. In May 2004, RIL submitted to the Management Committee of the PSC an Initial Development Plan, inter-alia, describing the nature of the discovery, the potential extent of 8 natural gas that could be extracted, the kind of infrastructure and expenditure necessary for the same, and the potential market for natural gas in India. It was stated that natural gas produced from KG-06 could be used by entities operating in the power and fertilizer sectors located in Andhra Pradesh, Maharashtra, C Karnataka, Gujarat and Uttar Pradesh. It was stated that such users could use up to 82 MMSCMD of natural gas. It was also stated that NTPC's demand could be as much as 17 MMSCMD. The production of natural gas was projected to be possibly 40.MMSCMD and that it could go up to 80 MMSCMD D a few years later. It was also stated that natural gas supply in India was highly constrained and the short fall had led to many units that use natural gas as a fuel or feedstock being stranded. RIL also stated that it expected to be the exdusive agent for selling natural gas produced from KG-06. This Initial E Development Plan was approved by the Management Committee of the PSC in November 2004. The Gol ·issued a Petroleum Mining Lease with respect to KG-06 on 02.03.2005.

27. In the meantime, in mid 2003 RIL bid in response to an international tender floated by the National Thermal Power Corporation and won the bid on the substantial terms that it llJOl,.lld supply 12 MMSCMD, for seventeen years, at a well head price of USO 2.34/mmBtu, plus transportation and marketing charges for a total of USO 3.18imm Btu at the Delivery Point at Kakinada. Negotiations began to execute a full fledged gas supply and purchase agreement and various drafts were produced, including the drafts of May, 2005 in which governmental approvals were stated to be required for RIL to supply natural gas to NTPC.

H 28. From the record it is also clear that between 2002 and

RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 849

INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.] 2005 various discussions were conducted in RIL and the A Reliance Group about using the natural gas that was likely to be produced from KG-D6, to support various internal business divisions and undertakings, such as petro-chemicals, captive power plants, the power plant of Reliance Patalganga Power Limited and power plants to be set up by Reliance Energy B Limited. An announcement was made that a 3500 MW power generating plant was to be set up in Dadri, l.Jttar.Pradesh using natural gas.

29. On July 27, 2004, in a Board Meeting of RIL it was decided that, in light of the fast emerging opportunities and exigencies and to facilitate quick response, all the powers of the Board be vested in MDA except those powers that the Board was required, by the Companies Act, 1956 and the Articles of Association, to retain. This exacerbated an already festering dispute between the two brothers, necessitating the intervention of their mother, Smt. Kokilaben D. Ambani leading to a Memorandum of Understanding, dated June 18, 2005, that was drafted with the help of lawyers and marked strictly confidential. Only a portion of the MoU was placed on record in the later stages of proceedings before the Division Bench. E It is an admitted fact that it has been executed by and between the mother and her two sons only.

30. The MoU provided that - with disputes between the brothers, the other matters of family assets, and interests in various businesses being settled - the best way forward would be by way of a scheme of reorganization in which the energy producing, financial services and the telecommunications divisions were to be demerged to the ADA Group for ownership and control. The remaining divisions were to be with the MDA Group, including petroleum exploration and production division. The MoU specifically provided that the approvals of statutory and regulatory bodies, the shareholders and the boards of Directors of various companies would be conditions precedent for operationalising the reorganization. It was also H

850 SUPREME COURT REPORTS [2010] 5 S.C.R.

A specifically stated that personnel of both MDA Group and ADA Group would participate in the process of preparation of the Scheme so that their mutual interests could be protected. It was also agreed that the same lawyer who drafted the MoU would also draft the Scheme. B

F 32. In addition to the above, and in the same section "Gas Supply", it was also stated, after KDA exhorted her elder son to ensure that stability was given to the ADA Group with respect to gas supply, that the MDA Group would act in "utmost good faith" and exert their "best endeavours" to work for and obtain G all the necessary governmental and regulatory approvals. It was also provided that the ADA Group would be given an irrevocable power of attorney to be able to independently pursue the same, though that was not to mitigate the burden to be borne by the MDA Group. KDA reserved the right to intervene and it was stated that ADA Group would have a right H

RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 851

INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.] to damages in the event that MDA Group did not act in good A faith. The binding gas supply agreements were to be executed within 45 days.

33. KDA issued a press statement, the day that the MoU was executed, stating that the differences between her sons were settled and that ADA will be responsible for Reliance B lnfocom, Reliance Energy and Reliance Capital. On the same day the Board of Directors of RIL also met. The minutes reveal that MDA stated in broad terms the terms of the settlement - that the energy, telecom and financial businesses were to be demerged to ADA, with himself remaining in charge of the other businesses. Thereupon he placed a ccpy of the press statAment of KDA and left the meeting stating potential conflict of interest issues. Other Directors continued and after expressing their thanks to KDA, it was recorded that some Directors felt that any reorganization be undertaken only if it is in the best interests of all the shareholders. To this effect it was resolved that a Corporate Governance and Stakeholders Interface Committee comprising independent Directors examine in depth all the issues relevant for reorganization and suggest a proposal to the Board, including any scheme. It was also resolved that the said committee of independent Directors also be assisted' by professionals, such as chartered accountants, solicitors, merchant bankers etc., including the lawyer who had drafted the MoU. F

34. Based upon such authorization the CG Group proceeded to perform its assigned duties, assisted by various professionals, and with the active participation of personnel of both ADA and MDA groups. On August 3, 2005 Term Sheets were prepared and executed by representatives of the two groups and it was provided therein that the Scheme would be G based on the terms agreed. With regard to the principal disclosures to be made in the scheme, it was decided that one of them would be about the fuel agreement for supply of gas that was to be executed. It was also provided that the Scheme H

852 SUPREME COURT REPORTS [2010] 5 S.C.R.

A would be framed in such a manner that the Resulting Companies, which were all to be 100% subsidiaries of RIL, would be listed on the same stock exchanges as RIL, and that after issuance of shares by the Resulting Companies to RI L's shareholders they would then cease to be subsidiaries of RIL. B The CG Committee formulated the Scheme's rationale of the demerger as one of substantial benefits that would accrue to the Resulting Companies on account of focused attention.

35. On August 5, 2005 the Board of Directors of RIL met and the CG Committee presented its recommendations. Some C outside professionals from the fields of law, accounting and finance also rendered their opinions and provided inputs. The minutes of the meeting show that one of the Directors of RIL particularly stated and emphasised that the gas supply agreement should specifically state that price and terms and conditions shall be subject to Central Government's approval. It is also recorded that all those present, including Cyril Shroff, who had prepared the MoU, was in charge of preparing the Scheme and was advising ADA with respect to gas based energy business, agreed with that view. The Board then resolved, inter-alia, that pursuant to proposals of certain professional organizations and the solicitor firm M/s Amarchand Mangaldas and Suresh A. Shroff and Co., and recommendations of the CG Committee, to segregate by a process of demerger the undertakings relating to C"al based F Energy, Gas based Energy, Financial Services and Telecommunications. They also further resolved that, pursuant to provisions of Section 391-394 of the Companies Act, 1956, a Scheme of Arrangement be filed by which each of the undertakings would be transferred to four different Resulting G Companies, including the transfer of the Gas based Energy Undertaking to Global Fuel Management Services Limited, which through various transmutations of its name became Reliance Natural Resources Limited, the main protagonist in these proceedings. H

RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 853

INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]

36. A Company Application for reorganisation of RIL was A filed in September 2005 in the High Court and based on its directions, meetings of the shareholders and the stakeholders under the aegis of a retired High Court Judge were conducted on October 21, 2005. The Scheme as presented was approved near unanimously by the shareholders and the stakeholders. B Subsequently, the High Court sanctioned the Scheme on December 09, 2005. The MoU and the terms in it relating to gas supply do not find any mention in any of the petitions as well as the sanctioned Scheme.

37. Beginning on June 30, 2005 representatives of both c the groups started negotiating the terms of gas supply agreements. Voluminous correspondence (Exh. F) ensued, mostly in the form of emails. Neither prior to the filing of the Scheme nor thereafter could the two groups arrive at any agreement. It is clear from the correspondence, that even until end of February, 2006 there was no controversy that was raised regarding the requirement of governmental approvals. The draft · NTPC-GSPAs of May, 2005 containing the requirement of governmental approvals had been' handed over to the ADA Group and it was agreed by an ADA Representative that it would form the basis for negotiation of gas supply agreements.

38. On January 12, 2006 a meeting of the Board of Directors of RNRL was called for, in which, a Gas Supply Master Agreement and a model Gas Sale and Purchase F Agreement, approved by the Board of RIL, were placed for consideration of the Board of RNRL. Two Directors, both nominees of the MDA Group, voted to accept the said gas supply agreements, and one Director, the sole nomin~e of the ADA Group, strongly protested. The said nominee of ADA G Group also wrote a letter protesting the same, and, inter-alia, alleged that he had been given the gas supply agreements the previous night, had no time to properly read through them, no one in the ADA Group got a chance to vet them and further that ..... - the gas supply agreements were illegal because they should H '

854 SUPREME COURT REPORTS [2010] 5 S.C.R.

A have been executed by RNRL only after ADA Group was fully in charge of RNRL. /

39. On January 27, 2006, RNRL was listed on the stock exchanges that RIL was listed on and the shares of RNRL were given to the shareholders of RIL as provided for in the Scheme. 8 In particular, each shareholder of RIL was given one share of RNRL for each of the shares he/she/it held with RIL, except certain specified shareholders of RIL as provided for in the Scheme. On February 7, 2006 RNRL was handed over to the C ADA Group for focused leadership of ADA after reconstitution _of the Board of RNRL as per the wishes of ADA and ADA Group. Thereafter on February 28, 2006 a letter was written by · RNRL to RIL alleging various malafide actions by RIL with respect to gas supply agreements, amongst other things.

D 40. In April, 2006, RIL applied to MoPNG for approval of the the well-head price of USO 2.34/mmBtu for the natural gas to be supplied to RNRL on the grounds that it was the same as the agreed price for supply of gas to NTPC. The MoPNG rejected it on July 27, 2006 and the same was communicated by RIL to RNRL. In the meanwhile, RNRL had also written to MoPNG asking for the approval of the same, though in the letter RNRL stated that the Gol's rights with respect to price formula/basis are only with respect to the valuation that Gol might wish to place en natural gas to determine its share of profit petroleum.

41. In the meanwhile RNRL was also writing to a number of governmental, statutory and regulatory bodies regarding the status of its gas supply agreements with RIL. In its statements made with respect to issuance of Global Depository Receipts, G in Luxembourg, RNRL specifically stated that gas supply agreements including price formula/basis would be subject to governmental approvals and if approved it would then be able to sell it to end customers at market prices.

H 42. On August 1, 2006 the MoPNG constituted a

RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 855

- INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.] Committee to "Formulate Transparent Guidelines for Approving A Gas Price Formula/Basis" for giving Government Approval under the PSC for the same. On August 17, 2006, the said Pricing Committee issued letters to various stakeholders, seeking their comments and thereupon submitted its report in November 2006. B

43. On November 8, 2006, RNRL filed Company Application under Section 392 of the Companies Act, 1956 seeking directions from the High Court to order RIL to change the gas supply agreements in a certain specific manner. C According to RNRL, the gas supply agreements were not bankable in international financial markets, did not demerge the business of supply of gas to gas based energy producing companies within the ADA Group and thereby the very purpose for which RNRL had been set up was negated. Further, RNRL also claimed that unless the said changes were made, the D Scheme would be unworkable and hence the reliefs as prayed for. RIL countered that the Company Application of 2006 was not maintainable, as the clauses that were being sought to be changed were not unconscionable, and the jurisdiction under Section 392 was only to ensure that the Scheme as presented to the shareholders and stakeholders was implemented and not to substitute better terms or to frame a better Scheme. According to RIL, Clause 19 of the Scheme provided that suitable arrangements with respect to gas supply were to be made and the gas supply agreements put in place by it were suitable because they protected the interests of both RIL and RNRL. Further, RIL also took the affirmative defense that under the PSC it was obligated to obtain approvals of the government. The MoU was not pleaded specifically by RNRL, though in the pleadings it raised issues about what had been G · promised to it which could be linked to the MoU. The correspondence between the two groups after the MoU, regarding the gas supply agreements were placed on record and analysed. H

856 SUPREME COURT REPORTS [201 OJ 5 S.C.R.

A 44. In May 2007, RIL submitted a price formula/basis to the MoPNG for its approval so that all gas from KG-06 could be sold at a price derived from that formula. Around the same time, RNRL also made a representation to the Ministry of Chemicals and Fertilizers that the Government should put in 8 place a Utilisation Policy which RNRL stated was a right of the Gol under the PSC and also take its share of profit petroleum in kind and distribute the same to power and fertilizer sectors at a reasonable price.

45. Be that as it may, in August 2007 an Empowered C Group of Ministers, consisting of Senior Cabinet Ministers, was constituted by the Gol, which met in a series of meetings (numbering six in all) between August 27, 2007 and January 8, 2009. The substantive decisions taken were: (i) acceptance of the price formula/basis submitted by RIL, based on, inter- D alia, an evaluation by the Prime Ministers Economic Advisory Council that the price band that would be derived pursuant to the price formula/basis was comparable to prices at which non- APM regime natural gas prices were prevailing. The formula was modified to set an upper limit to the crude oil at USO 60 E and set the biddable factor to zero so that the alleged non- transparency aspect could be mitigated; (ii) set in place an Utilisation Policy that specified the sectoral allocations and priority list of the sectors; (iii) that all users should be in a position to consume gas right away or within a short period of time and that there was to be no reservation of gas; and (iv) the policy was to be effective for five years.

46. While the EGOM meetings were being held the litigation between RIL and NTPC, and RIL and RNRL were in various stages before the High Court. It appears that while exercising its sovereign right to frame policy of national importance, EGOM was also sensitive to the issue of decisions to be made by the concerned courts, and hence noted that the decisions of EGOM would be without prejudice to the rights of the litigants as decided by the Courts. H

RELIANCE NATURAL RESOURCES LTD. v. RELIANCE '857 INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]

47. A final order and judgment was passed, on A 15, 10.2007, by the Learned Company Judge. The judgment held: the Application under Section 392 to be maintainable, that the Company Court was not competent to dictate the specific changes sought, that the GSMA was in breach of the Scheme, that the MoU was binding on both parties, and that "suitable B arrangements" in Clause 19 of the Scheme had to be read in light of the MoU and that it was necessary for the Scheme. The Learned Company Judge also held that such gas supply contracts would be subject to Government's approval, pursuant to NELP and PSC and it was further held that Government c should normally approve such contracts unless clearly in breach of public policy and public interest. The Learned Company Judge then ordered the parties to renegotiate.

48. Both sides filed appeals before the Division Bench against the said judgment. As a number of interim orders were D passed at the stage of the proceedings before the Learned Single Judge and then later on before the Division Bench, the Gol intervened in the proceedings as it had been realized that it had a vital stake because the dispute involved issues that could affect national development, national interest and also E Gol's revenues.

49. The Division Bench disposed off the appeals of RIL and RNRL by its order and judgment dated 15.06.2009. The decision at the level of the Division Bench turned, it seems, on F the fact that a portion of the MoU was jointly tendered by RIL and RNRL and apperception of the Division Bench that under the PSC, RIL is entitled to a physical share of natural gas, as a part of cost gas and profit gas. Further, the Division Bench seemingly agreed with the conclusions of the Learned G Company Judge and then departed from it. Substantively it was held that a fixed quantum of 28 MMSCMD plus 12 MMSCMD in the event that NTPC contract did not fructify stood allocated and to be supplied for use in any of REL's power projects, and that the allocations made were a class apart in themselves.The H

858 SUPREME COURT REPORTS [2010] 5 S.C.R.

·Aprice of supply was to be in accordance with the PSC - but as there was no clause in the PSC prohibiting RIL from sellir.g. it at a price lower than that arising from the price formula/· approved by the Government, natural gas up to the first 40 MMSCMD at a well head price of USO 2.34/mmBtu of natural B gas stands allocated to RNRL, as RIL would still make profits at that price point. Further, the Division Bench also ordered the parties to renegotiate with respect to issues regarding identity, definition of affiliate and limitation of liability to make the gas supply agreements bankable. c 50. There is considerable confusion as to what the Division Bench ordered with respect to Utilisation Policy and its applicability with respect to the Option Volumes of natural gas provided for in the MoU. The three parties to this case have urged three different interpretations regarding the same. D

51. Aggrieved by the said Judgment and Order of the 'Division Bench all the parties have approached this Court in appeal by way of special leave. The Union of India which was allowed to intervene before the Division Bench, being aggrieved by certain findings, has also preferred an appeal against the Judgment and Order of the Division Bench. After initially raising objections, the Learned Senior Counsel appearing for RNRL, Shri. Ram Jethmalani withdrew his objections to leave being granted. Further, in as much as on the face of the record it would appear that the PSC, to which the Uol is a party, has been interpreted without the Gol having had an opportunity to be properly impleaded and present its case and the potentially serious public interest implications that arise therefrom, leave has been granted to the UOL

52Copy pinpoint52. Now we shall proceed to summarise the contentions of the parties made during the oral hearings spanning 27 days and in the many thousands of pages of written documents. A number of authorities were also cited by each of the counsel in support of their arguments. We make it clear that we shall H

RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 859

INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.] advert only to those submissions and citations which are A necessary for disposal of these appeals.

PART Ill

SUMMARY OF THE SUBMISSIONS OF THE PARTIES: B

53Copy pinpoint53. Though the first party to file a special leave petition in rhese proceedings was RIL, and it is Shri Harish Salve, the learned senior counsel for RIL who led the arguments, because of the fact that it was RNRL's petition and the main attack was initiated by RNRL in the courts below, we consider it c appropriate and convenient to note their submissions first. \Nhile there is a welter of facts and arguments it would also be quite clear that there has been a set of consistent themes flowing right through this case. in addition, at the earlier stages of proceedings the public interest and public law elements were D not properly before the courts. Though late, with the entry of Union of lnd!a as a full fledged party to the case, the issue of public interest and welfare has also come to be crystallized.

CONTENTIONS OF RNRL: E

54Copy pinpoint54. The line of argument that RNRL has taken in the course of these proceedings can be gleaned from the Six Protested Points they have raised about the underlying gas supply agreements. They are about Price, Quantity, Tenure, Identity of Buyer, Definition of Affiliate and Limitation of F Liability. We note each one of them below as substantively argued by Shri. Mukul Rohtagi, learned senior counsel appearing on behalf of RNRL.

1. Price: The natural gas that is to be supplied to it, not including the Option Volumes, should be at a G fixed price of USO 2.34/mmBtu well head cost plus marketing margins and transportation charges at the delivery point for a total of USO 3.18/mmBtu. Contemporaneously, while various commitments H

860 SUPREME COURT REPORTS [201 OJ 5 S.C.R.

A were being made by RIL between 2002 to 2005 to the gas based energy producing division while it was a part of RIL, a bid was offered on the international tender floated by NTPC at the said price. In as much as that was the only B contemporaneous arms length and a market determined price, it is contended that the same price should apply to RNRL as it is the derivative of and the successor in interest to. that gas based energy producing division. c 2. Quantity: The quantum that RNRL should receive 28 MMSCMD plus, in the event that NTPC's contract does not go through, an additional 12 MMSCMD. It is argued that the size of the_ gas based energy producing plant, at Dadri, of 7500 D MW of generating capacity is the first determinant of the requirement of 28 MMSCMD. The other 12 MMSCMD is based on the required supplies for RPPL and other gas based energy producing plants it had proposed to set up. According to RNRL E these were commitments that RIL had made prior to the demerger and even prior to the MoU and hence ought to honour them.

3. Tenure: The tenure should be a firm 17 years, as that was the term that had been promised to NTPC F and that the provision regarding the same should be as stated in the draft agreements with NTPC.

4. Identity of Buyer. In as much as the gas supply agreements mandate that it nominate an affiliate G from within the ADA Group that is engaged in gas based energy production as a buyer, and the gas is directly supplied to it and payments made to RIL are also from that quarter, the very purpose for which RNRL has been set up, to supply gas to gas based H

RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 861

INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]

energy producing companies and thus promoting A the setting up of such companies, would be negated. It is contended by RNRL that a fair reading of the Scheme would reveal the same.

5. Definition of an Affiliate: According to RNRL the 8 definition of an affiliate should not require 51 % ownership, but rather the definition as contained in either the PSC or the NTPC draft agreements. It is argued that by restricting its nominees to only those companies in which RNRL owns at least 51%, the freedom of RNRL to set up gas based energy producing companies is automatically restricted and in as much such a restriction was not placed on NTPC it should be accordingly changed. Further, RNRL also contends that the definition of affiliate as provided for in the PSC could also be appropriate.

6. Limitation of Liability: The promise made to RNRL was that gas would be supplied to it from any of the gas fields given to RIL by Gol, and consequently it should be possible to draft a liability clause that becomes operative in the event that there is no gas available at any of the gas fields or for reasons beyond the control of RIL. F

55Copy pinpoint55. The three themes that RNRL presses are and they relate to Government Approvals, binding nature of the MoU and maintainability in seeking the 1 eliefs claimed as above.

1. Government Approvals: In its claimed reliefs, RNRL seeks the deletion of Section 13.9 of the GSMA and Clauses G (d) and (e) of Schedule 3.2 of the GSPA, which substantively deal with the issue of approval of the price formula/basis and also of applicability of governmental utilization policy or any other powers of the Gol to curtail production or otherwise prevent RIL from supplying natural gas. The first contention of H

862 SUPREME COURT REPORTS [2010] 5 S.C.R.

A RNRL, as pressed by both Shri. Jethmalani and Shri. Rohtagi, is that under the PSC what is shared between RIL and Uol are physical quantities of natural gas, and that is what a PSC mearis - sharing of production. For this proposition reliance is placed on CIT v Enron Oil and Gas India Ltd. 9 Further, it is B also argued that because the Contractor expends monies on exploration, development and production and is allowed to recover its costs first, it should be deemed that the title to natural gas to the extent of cost and profit petroleum pass to the Contractor at the Delivery Point when natural gas is first c brought on-shore. To this effect they rely upon the provisions of Article 27.2 of the PSC. Consequently, they also argue that the approval of price formula/basis in Article 21.6.3 of the PSC is only to facilitate Gol in placing a value on natural gas so that its share to physical quantity of natural gas under the Profit Petroleum component can be calculated. They also argue that 0 if Gol is allowed to determine price and also frame a utilization policy, then the absolute freedom to market, as promised in NELP and in Article 21.3 of the PSC would become otiose.

9. (2008) 305 ITR 75

10. (1991) 1 sec 212.

H 11. (1990) 3 sec 752

RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 863

INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]

Consumer Education & Research Center¹² • Further, they also A argue that EGOM decisions cannot be held to be applicable in a manner that would affect its pre-existing contractual rights with RIL as executive action cannot interfere with contractual rights. To this effect they rely upon Rai Sahab Ram Jawaya Kapur & Ors. v State of Punjab 13 , State of Madhya Pradesh v B Thakur Bharat Singh 14 , and Poonam Verma v OOA 15 . Even if one were to consider EGOM decisions as policy, it cannot have retrospective effect and to this effect they placed reliance on Union of India & Ors. v Asian Food lndustries, 16 and Kusumam Hotels (P) Ltd. v Kera/a SEB 17 • Moreover, in as c much as in the EGOM minutes it is clearly recorded that their decisions are without prejudice to the rights of RNRL in the court cases, RNRL's rights were beyond the pale of EGOM's decision. For interpretation of the expression "without prejudice" they relied upon NTPC Ltd. v Reshmi Constructions, 18 Builders 0 & Contractors. Finally, arguing that Article 297 of the Constitution does not give sovereign rights to Gol with respect to dealings with its own citizens to change contractual rights and that sovereignty is restricted to the sphere within the international context, Shri. Jethmalani relied upon Madhav Rao Jivaji Rao Scindia v Union of /ndia 19 • E

2. Binding Nature of MoU: It is the contention of RNRL that the MoU is binding upon all and hence, the main commercial terms provided in its gas supply section should be faithfully followed, as they relate to the Six Protested Points. F Shri. Jethmalani argues that at the time of the execution of the

12. (1995) 5 sec 482.

13. 1995 (2) SCR 2.

14. 1967 (2) SCR 454. G

15. (2007) 13 sec 154.

16. (2006) 13 sec 542.

17. (2008) 13 sec 213.

18. (2004) 2 sec 663.

19. (1971) 1 sec 85. H

864 SUPREME COURT REPORTS [2010] 5 S.C.R.

3. Maintainability: It was also argued by the Learned Senior Counsel for RNRL that the power of the Company Court

20. 2924-25 ALL ER 280.

21. (1963) 2 QB 606. F

22. (1966) 1 ALL ER 193.

23. (1971) UKHL 1; (1972) AC 153.

24. (1995) 3 ALL ER 918.

25. (1966) 6 sec 665.

G 26. (2008) 12 sec 541.

27. (1956) 3 ALL ER 624.

28. (1997) 8 sec 683.

29. AIR 2004 SC 86.

30. (1989) 1 sec 264.

H 31. (1997) 89 Comp. Cases 227.

RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 865

INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.] is of the widest amplitude and that in fact it is the duty of the A court to ensure that the Scheme is fully implemented and the only limitation on the powers of the court is that it cannot change the character, purpose or basic structure of the Scheme. He relied on S.K. Gupta v K.P. Jain 32. B CONTENTIONS OF RIL:

56Copy pinpoint56. RIL's position with regard to the Six Protested Points was argued by Shri. Harish Salve as follows:

The basic contention of RIL is that under the PSC the Gol c has the right to approve the price formula/basis on which sales can be effectuated, pursuant to Art. 21.6 et. seq. Additionally, it says that ordering it to supply at USO 2.34 mmBtu well head price even if the valuation placed by Gol is much higher is misconceived, because it cannot recover its interest costs and D its investments are recouped over a long time frame, its rate of return which is very, very modest will be threatened and that it would amount to RIL subsidizing RNRL, which was never contemplated in the Scheme. The Scheme cannot be changed to the detriment of shareholders of RIL. E It was submitted that RIL can commit to supply only that amount of gas as have been certified to be proven reserves. In early 2006, the total amount of natural gas in gas field that would be required to commit 28 MMSCMD and the Option Volumes had not yet been certified; and it was not known whether P1 reserves were available beyond the 12 MMSCMD needed for NTPC.

RIL contends that the kind of certitude that is being demanded by RNRL could have been given by it only if certified and proven reserves were known. Further Shri Salve submitted that as and when new reserves became known, new GSPA's would then be executed with a nominee of RNRL. In fact it is RI L's contention that if certified reserves were known and firm

32. (1979) 3 sec 54. H

866 SUPREME COURT REPORTS [201 O] 5 S.C.R.

A commitments had been made, given that the project in Dadri, in 2006, was nowhere near completion, RNRL would have had to suffer the very onerous "take or pay" clauses in the Industry. Shri Salve also argued that in any event it cannot commit supplies beyond the validity of the Mining Lease which expires B in 2025.

It was argued by Shri. Salve that the protest of RNRL about limitation of liability was in fact frivolous and that the clause is being protested by only selectively reading it. The phrase "short fall" in the clause in the GSMA, RIL says, refers to non- e availability of natural gas and not a voluntary shutting of gas supply by RIL.

RIL contents that the Scheme itself postulates supply of gas only to power plants of REL and RPPL. However, the fact that D GSMA has included a definition of affiliate so that it can take on the higher responsibility of supplying gas even to power generating units started by entities other than REL and RPPL providE!d RNRL owned at least 51 % of that company demonstrates the good intentions of RIL. It further contends that in fact the GSMA is more flexible than the Scheme or for that matter the MoU and hence, on that count RNRL has no right to contend that the definition of affiliate should be wider than what was provided in the GSMA.

It was submitted that the GSMA and GSPA fully comply with the requirements of Clause 19 of the Scheme, which requires that arrangements be entered into with RNRL for supply of gas to the power plants of REL and RPPL. Under the GSMA, RNRL would have the right to nominate affiliates to whom gas is required to be supplied under different GSPAs. G The GSPA's are to be entered into with companies who are engaged in generation of electricity like the REL. R(L also further contends that the Scheme does not contemplate RNRL purchasing the gas and selling the same to its affiliates at a profit. RIL says that the buyers under the Scheme were to be companies which actually own and operate power plants and

RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 867

INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]

moreover under the PSC the title can only pass to the end consumer at the delivery point. It was stated that the scheme envisaged that RNRL take delivery of gas at the delivery point on behalf of the buyers and arrange for its transportation to the ultimate consumption point and for this purpose charge a marketing margin which must be nominal and the transportation. B charges incurred. The submission was that the very names Gas based Energy Undertaking suggests that the value arises, not from trading of gas, but from generating energy from gas. Shri Salve explained that the procedure that RIL put in place, whereby the GSMA is with RNRL and the GSPA with its . c nominee company that is actually starting a gas based electricity generating plant, would make it bankable for both the power generating company as well as RIL. It was his contention that in the event that RIL did not get paid and with "take or·pay" penalty not being there, then it would at least have a company with some actual assets against which it can proceed to collect.

57Copy pinpoint57. With regard to the issue of bankability of the GSMA and GSPA, it was submitted that RNRL has not shown one single document or produced any evidence suggesting that they are not bankable in the international financial spheres. It was submitted that contrary to RNRL's assertions that they are not bankable, RNRL has in fact raised substantial funds, both domestically and abroad. RIL also contends that even though such huge sums of money have been raised, not a brick has been laid so far to begin the construction of the Dadri power plant in Uttar Pradesh. It was also stated that by entering into GSPA's with the nominee companies that would be setting up gas based power plants, it would actually make the agreements bankable because it is the nominee companies which need to raise monies to establish the power plants. G

58Copy pinpoint58. Shri Salve argued that as a matter of both law and logic, within the context of the scope of this litigation, the rights of RNRL vis-a-vis RIL cannot transcend the rights possessed by RIL and actually demerged by RIL. The rights of the Uol with H

.868. SUPREME COURT REPORTS [2010] 5 S.C.R.

A respect to approval of the price formula - and thereby affecting the price - and to.. frame a government utilization policy effectively delimit.s'RiL's own rights as to what it can do with thli natural gas. Ii is mandatory that RIL strictly remain within those boundaries. The width and nature of Gol's control can be B discerned from its continuing and constant role in overseeing a'"~~vities in all aspects and phases of the Petroleum · · ·tY~erations. Further, Shri. Salve says that what RIL gets is not a physical share but onl;t a share of the value, that the title only passes to the end user and purchaser at the Delivery Point and c not to RIL when natural gas is extracted and that RIL can really only act as an agent of Uol.

59Copy pinpoint59. According to Shri. Salve, what was approved by the shareholders and formed the basis for sanction of the Scheme, has in.faCt been propounded by the Board. The minutes of the D Board meetings and the discussions recorded clearly show that the' Board sought the opinion of the CG Committee and outside . professionals in deciding whether to go with the reorganization ,,~-Qrnot, and also the nature of the Scheme that was to be put ~' ·'' ,•,:·,.... . '

· together. It is clear from the record that the Board acted E independently and collectively. What it did not include in the ·Schemi:ttherefore cannot now be said to be a part of the .. ·:'' :·:·: .. )¢~ . -·~- ,

Sche!TI¢ itself. With respect to gas supply agreements, the Board''had c!ear~y recognized that they were not permissible without governmental approvals, and in fact the personnel of F ADA Group knew this and so did the lawyer who put the scheme together, drafted the MoU and was advising ADA.

.60. Shri. Salve argued that the MoU was a confidential document from the private domain of the promoters and was ._ G executed in the context of settlement of family disputes. In as ' rnutt:i as th.e MoU was never placed before the Board or the '.'''''sharel;\Qlders, it cannot be deemed to have been approved by them. According to Shri. Salve, Sections 193, 194 and 195 of _the Companies Act, 1956 raise the presumption that the record

RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 869

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of the proceedings of the meetings of the Board are accurate A The minutes of the Board were never challenged and were never put in issue in any proceeding.

61Copy pinpoint61. With respect to the Doctrine of Identification, Shri Salve argues that it has no relevance in the context of the facts of these cases. The resolutions of the Board vesting vast powers upon MDA themselves speak of the fact that the powers which the Board was required to retain, by the Companies Act, 1956 and the Articles of Association, it did so. Under Section: 293 of the Companies Act, the Board cannot sell off or otherwise dispose off an undertaking without the consent of the shareholders. Consequently, the Board cannot relieve itself of the powers wi.th respect to matters that only it can take a decision on. The record clearly indicates that Directors ac:ted independently and that the Board applied its collective mind after obtaining the necessary inputs and recommendations of the CG Committee and other professionals and accordingly had the Scheme prepared and recommended to the shareholders. Consequently it is not MDA who acted but the Board itself. Hence, the Doctrine of Identification which arises in cases involving torts and criminal liability has no application here. E

62Copy pinpoint62. MoU is an antecedent document that should not have been considered by the Courts below. Even if considered, the Mou itself contemplated that the actions necessary to start the process of reorganization had conditions precedent which F included approvals by the Board and the shareholders. Further, the MoU itself also shows that governmental approvals were always known to be necessary.

63Copy pinpoint63. RNRL's Application Not-Maintainable: According to Shri. Salve and Learned Senior Counsel Shri. R. F. Nariman, G the powers of the Company Court under Section 392 cannot be greater than the powers 4nder Section 391 of the Companies Act, 1956. The width of the powers of the Company Court are that of an umpire, ensuring that the rules of the game are fair, and then allowing the parties to inter-se decide the H

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A appropriate terms of commercial exchange. The Court pursuant to Section 391, for instance, cannot compel the parties to substitute a Scheme approved by the members of the classes required to approve the. Scheme with what the Court feels is a better one. Shri. Nariman. relied upon Miheer H. Mafatlal v B . Mafatlal lndustries. 33 Consequently, under Section 392 the ' Court cannot impose its own wisdom, and change the basic fabric of the Scheme itself. Reliance was placed on S.K. Gupta (supra). Further, Shri Nariman also argued that in search of modification, it is impermissible to substitute a portion of the c Scheme with a new Scheme. Reliance was placed on Meghal Homes (P) Ltd. V Shree Niwas Girni K.K. Samiti & Ors 34 • According to RIL there is nothing unconscionable in the six clauses that have been protested and hence also the application by RNRL was. not maintainable.

64Copy pinpoint64. Scope of Clause 19 of the Scheme: Shri. Rohinton Nariman argues that what was provided for in Clause 19 with respect to the gas supply was a "suitable arrangement," which means an uncrystallized arrangement to be negotiated. This, according to Shri Nariman is to be contrasted with the crystallized agreements and rights to use Reliance brand logo etc. whic,~ are also found in Clause 19 and this difference must be interpreted to be intentional. Further, according to Shri. Nariman the "suitable arrangements" with respect to gas supply were to be between the Demerged Company owned by two million shareholders and the Gas Based Resulting Company, whereas the MoU on the other hand is between three shareholders out of two million shareholders and consequently it cannot now be said that the gas supply provisions of MoU constitutes the phrase 'suitable arrangement'. Shri Nariman G also argued that what is contemplated in Sections 391-394 of the Companies Act, 1956 is an arrangement between the company and a class of shareholders. The present Scheme

33. (1997) 1 sec 579.

H 34. (2007) 7 sec 753.

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treats all equity shareholders as a class. The Mou was between A three shareholders and has notning tc do with the entire class of shareholders who· approved this Scheme. Further, Shri Nariman also argued that if the MoU were known to the Board, then the fact that the terms and conditions of the gas supply contained therein were kept out, indicates that the act of . B omission was deliberate and hence foreign to the Scheme.

CONTENTIONS OF THE UNION OF INDIA:

65Copy pinpoint65. According to Learned Solicitor General, Shri. Gopal Subramaniam, there are two kinds of Production Sharing C Contracts, one in which physical produce is shared and the other in which revenue is shared. He relied on a book "International Petroleum Fiscal Systems and Production , Sharing Contracts" by Daniel Johnston. D

66Copy pinpoint66. The Learned Solicitor General, presenting a synoptic view of the history of oil production contracts, from early concessions to mode·rn day arrangements, says that the PSC's evolved to give the State greater control over all aspects of petroleum operations. This includes the right to determine the expenses to be incurred, the rates of production, the equipment to be used and also which markets to sell to or not to sell to. Further, the Learned Solicitor General submits that PSC's have many aspects which are negotiated and the specific set of rights given, in terms of recoupment of costs, the extent and delineation of such costs determines the particular bargain struck. Hence, an assumption or conclusion that because a contract is titled "Production Sharing Contract", physical, quantities of the produce are to l':le shared would be erroneous. The specific terms of the contract ought to be determinative, rather than a general assumption. G

67Copy pinpoint67. According to the Learned Solicitor General the concept of Permanent Sovereignty over natural resomces is a widely accepted one in international law and UN General H

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A Assembly Resolution 1803 of 1962 specifically recognizes tf. ~ same. Further, it was also argued that, in fact, forms C'f ;Jsc developed as a result of such a resolution. Under the new contractual systems in the petroleum industry. as opposed to the historical concessions given by Persia for instance, the 8 ownership of the resource vests and continues to vest with the sovereign until it is disposed off. It was pointed that Article 297 of the Constitution declares that minerals and other resources underlying the ocean vest in the Union of India. Learned Solicitor General specifically stated in his oral arguments that the PSC c was placed on the floor of the Parliament.

68Copy pinpoint68. It was argued thatthe EGOM decisions, regarding the utilization of natural gas and the price formula/basis, have never been challenged independently and that the present litigation is an attempt, in a seeming internecine war, to waylay Gol D policies in a Company Petition. Learned Additional Solicitor General Shri. Mohan Parasaran points to Articles 77(3) and 73 of the Constitution and argues that the powers of EGOM are not merely traceable to the PSC but also to the powers flowing from such Constitutional provisions and its policy decisions have the force of law.

69Copy pinpoint69. Arguing that distribution of national property and state largesse has to adhere to the dictates of Article 14 of the Constitution, Shri. Mohan Parasaran says that if the Gol had effectuated the distribution of natural gas in the manner in which it is being claimed to have been allocated by the MoU, in secret and without it being offered to others, it would be liable to be struck down by the courts. To this effect he relies on R.D. Shetty v. International Airports Authority of lndia 35 and F. C.1. v. G Kamdhenu Cattle Feed lndustries 36 . Further, Shri. Parasaran also argued that the State is enjoined to distribute the material resources in a manner that promotes common good. In this regard he assails the demands of RNRL for a reservation of

35. (1979) 3 sec 489.

H 36. AIR1993SC1601.

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gas that places vast amounts of it in the hands of one elltity as A being detrimental to common good. He relied on State of Tamil Nadu v. L. Abu Kavur Bai37 and Safar Jung Sugar Mills Ltd. v State of Mysore 36 • Shri. Mohan Parasaran also stated that natural gas is to be used for national development and placed reliance on Association of Natural Gas & Ors. v. Union of India B :..j & Ors. 39

70Copy pinpoint70. Learned Additional Solicitor General Shri. _\1ivek Tankha explained that natural gas. is a very scarce resource in India and that many units which could use it have been stranded C· on account of its non-availability. In fact, he pointed out that, a Chief Minister and others have also written to Gol with regard to non-availability of natural gas from KG-D6 on ·account of the clair:ned reservation of natural gas by RNRL. Additiona·11y, he ., submitted that the market for natural gas in India is undeveloped. D Shri. Tankha pointed out that the network of pipelines that can transport na\ural gas in India is very small in comparison to developed Nations. This, he pointed out, mean·s that m!'lny regions of the country cannot get access, and reservation of such huge amounts of gas by one entity would mean that other regions would not be able to access such gas after pipeline is developed there. He also stated that while some new discoveries have been made, some of the older fields are likely to run out of natural gas. In light of such factors, Shri Tankha argued that, it is very important for Gol to be able to monitor and frame policy forutilization of natural gas. It was emphatically stated by him, and also by Shri. Mohan Parasaran, that any marketing freedom under the PSC can be only pursuant to a gas utilization policy put in place by the Geil. ·

71Copy pinpoint71. Shri Mohan Parasaran analysed Articles 27.1, 27.2, G in conjunction with Article 21.1 and posited that title to PSC can pass to an end user only upon sale, and su(;h sales have to be

37. 1984 (1) sec 515.

38. 1972 (1) sec 23.

39. 2004 (4) sec 489. H

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A in accordance with a utilization policy. With respect to what is shared between the contractor and the Gol, he argues that it is revenue. To this effect he also drew our attention to the fact that the PSC considered by this Court in CIT v Enron Oil & Gas India Ltd. (supra) - is different from the PSC in hand, and B . hence that case is not applicable.

72Copy pinpoint72. Shri. Mohan Parasaran interpreted Article 21.6 to mean that arms length prices and the price formula therein as being applicable with respect to all gas produced and sold from C KG-06. PART IV

WHOSE GAS IS IT ANYWAY? WHETHER A CONTRACTOR BECOMES THE OWNER OF THE D GAS?

73Copy pinpoint73. Shorn of all the details and lengthy submissions and contentions we shall now proceed to consider the relevant and substantive issues that are required to be dealt with. It may be necessary to have a bird's eye-view about the importance of the natural gas and the evolution of the PSCs. We also set forth a broad and a brief overview of the political economy of natural gas industry and the evolution of the various arrangements between sovereign nations and oil companies.

74Copy pinpoint74. Natural Gas is a mixture of hydrocarbons, but mostly methane and is a primary source of energy. It is formed by the conjuncture of a random set of factors - biological, physical, chemical & geological - intersecting precisely to trap the formed gas in underground cisterns (See: Association of Natural Gas). The known reservoirs across the globe are randomly distributed. Those regions that have many large reservoirs are considered to have been favored by the cosmic dice. The difficulties of exploration and mining, and the location specificity of reservoirs have a direct bearing on identification of those reservoirs, extraction from them and subsequently distribution H

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of natural gas. Its gaseous nature makes it expensive and difficult to store and transport. Between continents it is shipped in the form of LNG; and overland it is transported by pressurized pipelines. It is used as a fuel and a feed stock in: (i) production of fertilisers, (ii) generation of power, (iii) transportation, (iv) households, .and (v) production of various products such as petro-chemicals, textiles, sponge iron etc. Its low carbon content, relative to other fossil fuels, implies that its use may help in combating global warming problems. Availability at an attractive price point could potentially induce entities in those sectors to switch to using natural gas. However, because it is also an c exhaustible and non-renewable resource, there is an imperative need to conserve it. Such conservation can be achieved by restricting the amount available and also by modulating the price. Because the differences in relative abilities to pay varies between different sectors, in conditions of extreme scarcity, it D is likely that certain sectors could out-bid others and corner the entire available quantities in unregulated markets; and that could lead to a shortage of supply to vulnerable sectors like fertilisers, power, transportation and households. Availability of natural gas to each of those sectors raises thorny questions of equality and quality of life issues 40 . E

75Copy pinpoint75. The size, scale, scope and nature of a market for natural gas is a function of the total supplies, the level of demand and relative abilities to pay by different user segments, the length and density of network of pipelines, the number of producers, distributors and retailers etc. One of the critical features of a properly developed market for natural gas would be the network of large capacity pipelines that can carry it to different regions, and then a further local network to distribute it to end users41 . Further, where that large capacity pipeline goes to, determines which regions get natural gas. In a large country, if many regions are left without access, then inter-

40. Handbook of Natural Gas Technology and Business, ed. Parag Diwan and Ashutosh Karnataka, Pentagon Energy Press (2009).

41. Ibid. H

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A regional conflicts could develop, especially if competition for primary energy sources intensifies. ·76. All of these factors play a role in classifying a market as developed or undeveloped. The market for natural gas in United States is considered to be the most developed, with historically large supplies being available, h'undreds of producers, many lakhs of miles of pipeline and dense local networks. Consequently spot markets have developed, in which prices are determined and are sensitive to various factors, including factors such as prices of alternative fuels and peak demand. In other jurisdictions with such features being less developed, prices have been set through formulae linked to prices of alternate fuels, including crude. Historicany natural gas industry has been highly regulated and it is only over past three decades that there has been a greater dependence on market o forces to effectuate market coordination. Different jurisdictions have chosen different paths, with variations regarding which of. the various stages of the value chain from production to end user access are regulated. The mechanisms for such regulation also vary from direct state commands to setting of rules and allowing private players to operate with relative freedom within those set of rules. The choices made seem to depend on various historical events, and factors and already established institutions and rules. 42 .4 3

77Copy pinpoint77. We have referred to C! number of journals, articles and books in this regard, too numerous to all be cited 44 , and one

42. Ibid.

43. Robert J. Michales; "Natural Gas Markets and Regulation", in the Concise Encylcopedia of Economics, 2nd Ed.

44. A small sample: Stephen Breyer: Regulation and its Reform, Harvard University Press (1982); Paul Stephen Dempsey: Deregulation and Reregulation-Policy, Politics and G Economics is Handbook of Regulation and Administrative Law ed. David H. Rosenbloom & Richard D. Schwartz, New York (1994); Colin Scott: The Jurisidification of Relations in the UK Utility Sector in Commercial Regulation & Judicial Review ed. Julia Black Peter Muchlinski & Paul Walker, Hart (1998); Cosmo Graham: Regulating Public Utilities-A Constitutional Approach: UNCTAD: Competition in Energy Markets TD/B/COM.2/CLP/60 GE. 07-50741 (2007); Gas Reguation; in 35 jurisdictions, Global Competition Review (2006); and Handbook of Natural Gas Technology & Business, supra note 40. Also see Integrated Energy Policy-Report of the Export Committe, H Planning Commission on India, Gal (2006).

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thing stands out: there are no completely unregulated free markets for natural gas anywhere in the world. By framing an overarching analytical framework, it can be observed that every jurisdiction grapples with three sets of issues relating to ensuring: (1) adequate supplies to meet overall energy and industrial needs; (2) equitable access across all sectors, especially those which have implications for quality of life; and (3) equitable pricing, even if market forces are allowed to play a much larger role. Three more issues are emerging with respect to ensuring: (4) energy security of the nation; (5) energy defense links; and (6) inter-generational equities. Under c conditions of scarcity, these latter factors may indicate a greater need for emphasis on conservation as opposed to current consumption. It would appear that markets, with their emphasis on current consumption and short run profits may lead to faster depletion, and consequently necessitate far greater and indeed 0 a primary role for the State in coordination and making choices between different objectives and value premises. While markets and private initiatives have an important role in garnering financial resources, developing and bringing new technologies to practical use. expanding the infrastructure, and E increasing supplies by identification of and extraction from new sources, if unmonitored and completely unregulated markets are also capable of causing great inequities, in access, overpricing and sometimes even under pricing (if e·xternalities, such as - environmental costs, are not taken into account) the resources. F

78Copy pinpoint78. It would be a gross understatement to say that India's identified reserves and availability of natural gas for domestic consumption are very small. The total proven and identified reserves of natural gas in India are said to be about 1074 BCM 45 . That may appear to be very large. It is not. United States G consumes around 22-23 Trillion Cubic Feet46 of natural gas every year - yes every year. According to MoPNG documents

45. MoPNG Basic Statistic (2008-2009).

46. Ene1ijy lnformaflon Administration, Dept, of Energy, U.S. Government. H

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A the total global reserves are around 6534 TCF 47 , and our access to those global reserves are very limited, because of relatively underdeveloped shipping infrastructure for transport of LNG and the difficulties in laying international and undersea pipelines for its transport from better endowed regions such as B the Middle East. While some new discoveries, such as the one in KG Basin, have raised hopes of the supply constraints easing somewhat, we should always remember given India's extremely low- in fact de-humanized - per-capita consumption levels of energy, such easing of constraints only implies an c easing with respect to the pressure of immediate and effective demand, and not with respect to potential demand that could arise with -economic growth and certainly not in relation to the kind of levels of consumption that would enable our people to live with a modicum of dignity. As the Planning Commission has stated, India's energy challenge is of a fundamental order 0 with immediate resonance in respects of our constitutional goals, internal and external security. India's energy security cannot be taken for granted - that would be disastrous, ethically impermissible and a fraud on the Constitution. Planning Commission also warns that the hubris of having large coal reserves is unwarranted; according to it, much of that coat_ is un-extractable and clean coal technologies are only possibilities and not certainties 48 .

79Copy pinpoint79. If, as many scholars state, oil production has peaked or will peak in the future 49 , India will increasingly have to compete for primary sources of energy and this may lead to geo-political instability on a global scale and even within national boundaries. Identification of our own domestic sources,. determination of whether they can be extracted from and

G 47. MoPNG Basic Statistics (2008-2009) citing BP Statistical Review of World Energy, June 2008 & OPEC Annual Statistical Bulletin.

48. Integrated Energy Policy: Report of the Expert Committee, supra note 44 ..

49. Adam R. Brandt: Testing Hubbert (2006); Alekle, Hook, Jakobsson, Lardelli, Snowden & Soderberger: The Peak of Oil Age, Energy Policy Vol. 38 (2010). There are of course many more articles in the public domain regarding this. There are of course industry experts who do not agree.

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augmentation of such sources with new forms of energy production, and balancing of needs between current consumption and future consumption, reserves for defense purposes etc., are all absolutely essential tasks which have to be performed by the Gol 50 .

80Copy pinpoint80. The network of pipelines for transport of natural gas is very small in length in India, of a few thousand kilometers only, and the density is also very low51 . Except for a few states, and that too a few small regions in those states, access to natural gas in the rest of the country is non-existent. It is not a wonder that at least one Chief Minister wrote to the Gol in the middle of the last decade protesting about non-availability of new natural gas discovered off the sea shore of that state's coast for various units located in that state which had already been started and lying stranded on account of lack of domestic supplies of natural gas. D

81Copy pinpoint81. Historically, oil production had been undertaken by major oil producing companies in the private sector52 . Their relationship with sovereign owners of such petroleum resources has changed over one hundred years of struggle of E the sovereigns. These struggles reveal nine zones of problems or great mischiefs that can occur: (1) of oil companies not producing even after discovery and not relinquishing the area of exploration; (2) of oil companies forming into pools and trusts to reduce production levels and keep the market prices at a F high level 53 ; (3) of oil companies financing armed revolutions

50. Integrated energy report, supra note 44.

51. See Basic Statistics on Indian Petroleum & Natural Gas, 2008-2009, MoPNG Gol.

52. Ernest E. Smith & John Dzienkowski, "A Fifty Year Perspective on World Petroleum Arrangements" 24 TEX. INTL L.J. 13 (1989). This is a broad G survey of the history of this industry post nationalization of Mexican Oil Industry and the citiations therein are very valuable resources.

53. In United States legislature and courts combated with development of anti- trust jurisprudence. See Ernest E. Smith & John Dzienkowski, ibid. Also see Oswald Whitman Knauth; The Policy of United States Towards Industrial Monopoly, Bibliolife (2010). H

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A and interfering in political aspects; (4)of oil companies claiming ownership rights over the areas in which oil could be produced from; (5) of oil companies claiming permanent rights to extract petroleum resources in-situ and taking the physical quantities away for marketing elsewhere; (6) of under development of B facilities for refining the petroleum and the Nation not having access to channels to market and distribute the resources 54 ; (7) of deception by oil companies via low posted prices, and thereby reducing the royalty payments to the sovereign owners and reaping higher rewards in downstream activities that were c also controlled by the oil companies; (8) sovereign owners not having any rights to determine what levels of production can take place and without rights in management of petroleum operations; and (9) joint off take agreements between oil companies and downstream divisions amongst them that controlled production, at an international level, keeping posted 0 prices low so that even if sovereigns tried to take over the industry, they could be beaten down with production from elsewhere55 •

82Copy pinpoint82. In response to such great mischiefs, different types of arrangements have emerged between sovereign nations and oil producing companies. The philosophical and operational differences are with respect to: (1) the lengths of time over which exploration could take place and the requirement that after the initial period, if requisite exploration is not undertaken or does not result in a commercially exploitable discovery, the return of the contract area; (2) nature, extent and mode of participation in management of the petroleum operations; (3) participation in price setting and price modulation functions,

G 54. The great mischiefs 3 to 6 led to nationalization of the oil industry in Mexico, in 1938. They also led to the first modern declaration that all natural resources belong to the people as a nation and to be used for national development and substantively informed the progress in international law, led by former colonies, that the people in those lands are the rightful owners and should benefits from the use of such resources . .H 55. Ernest E. Smith & John Dzienkowski, supra note 52.

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through both administered price mechanisms and also through varying the quantity available in the market; (4) setting up of a financial system between the oil produces and the sovereign involving various parameters such as the tax regime, royalty structures, and sharing of production - the last one being in terms of physical quantities or in terms of realized value after sales; and (5) assertion of sovereign ownership rights of both in-situ and also of extracted resources. These parameters obviously vary across various regimes and jurisdictions. These aspects enter into the complex conspectus of factors with respect to negotiations of particular arrangements. Factors c such as levels of competition for exploration activities on a global-scale at the time of such negotiations, the certitudes of fiscal systems proposed, assessments of the hydro-carbon potential (which in turn depends upon historical discoveries already made and extracted from) etc., would play a role in the 0 particular bargain as Learned Solicitor General Shri. Gopal Subramaniam stressed.